United and innovation: Fees are the best you can do? Really?

So here’s a Fortune interview with Jeff Smisek, CEO of United Continental, talking about innovation.

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So do baggage fees really count as innovation?

That’s a tough pill to swallow. And I say that not because I object to baggage fees. Rather, I don’t see how you can pitch disaggregating service as innovation when it is what every other firm in the industry is doing. United wasn’t even the first firm to unbundle baggage handling from their primary service offering (I believe that honor goes to American among the major US carriers). I don’t see how utilizing the same fare structure as every other major carrier not named Southwest moves you from providing a commodity service.

It is also not clear that they are unbundling services solely to offer customers greater flexibility and to prevent one class of customers from cross-subsidizing another. United will still bundle when it suits them. Take, for example, frequent flier miles. In United’s eyes they have value. They charge $67.25 to buy a thousand miles. However, they will not offer me a discount to forgo them. Airlines love to talk up the wonders of their frequent flier programs but I think they would profoundly embarrassed by the number of customers who would take a $50 discount over accumulating miles toward loyalty awards.

That said, Continental’s FareLock program sounds pretty cool. That certainly is an innovative solution to a consumer problem. It seems that the charge for holding a reservation varies. How to price that well would be an interesting problem — particularly as you get near the time of the flight. If a consumer wants to hold three seats four months out, there will certainly be other opportunities to sell the seats. A week out, however, it is a different story.

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“It is impossible for us to be a low-cost provider because we are a global hub operation”…really?

Southwest is the last innovation in the airline industry by offering direct flights that compete with driving to your destination. This guy fidgeted when he brought up bag fees.

“if we lose your bag, it costs us $100 to run it out to the guy”…I have an idea…don’t lose the bag. Then no one has to subsidize your incompetence. An innovation would be to reduce, eventually to Zero, the baggage fees as you improve your operation and you can market your improvements to your consumers. Fees last year were $25 (or whatever)…but this year, because we are better at our jobs it is only $17.50.

In some regards, most of the airline works like the Military Industrial Complex and the Healthcare Industrial Complex. They are cost plus operations that are rewarded for not managing their costs.

By my calculations, appropriate cost management in Healthcare could save $185B a year in just direct labor. Put that over 10 years, the de facto Govt. timeframe, and the Affordable Healthcare Act is actually paid for without raising taxes, forcing compliance, paying the Govt. administrative expenses to monitor who gets fined, etc.

As long as companies see their costs as unavoidable, they will continue to drive their customers to other options. They open a wide window of innovation that a competitor, or new competitor, can drive a truck through. A few company names have been turned into verbs: Skype and Hipmunk. These innovations are disruptive enough to an industry that we now say “We are going to Hipmunk the ____ Industry”.